‘If the company ain’t broke, fix it anyway’

This article first appeared in The Edge Malaysia Weekly, on January 29, 2018 - February 04, 2018.
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THE average lifetime of companies is shrinking dramatically due to the intense levels of disruption they face today, says The Boston Consulting Group (BCG).

According to the global management consulting group, at any point, about a third of large US companies experience a severe, two-year decline in their ability to create shareholder value. And within that pool, about a third fail to recover within the following five years.

“What we are seeing is that one in three out of all listed companies in the US will disappear in five years, up from one in 20 fifty years ago. So when people talk about disruption and things moving so fast, I know it’s a bit tiring to listen to, but the number shows that this is the reality. We can see that the corporate mortality rate, or the average lifetime of a corporation, has been shrinking dramatically … while the lifetime of people has been going up,” Lars Fæste, a Denmark-based senior partner at BCG tells The Edge in an interview in Kuala Lumpur.

For companies to have a future amid highly disruptive markets, they need to frequently reinvent or transform themselves — most need to at least once in five years, he says.

It’s good for business leaders to have “constant paranoia” about what could go wrong in this disruptive environment, says Fæste, who also drives BCG’s special tranformation and turnaround unit, BCG Turn.

“Even if you’re at your best as a company, you need to think about what could hit you and what are the opportunities, and change, even though you are very strong,” he remarks.

“I think the best companies are the ones that are always thinking about transformation. Look at Samsung, which is making historical profits — they are constantly in a crisis mode. They have been in a crisis mode for 30 years while building this fantastic company. This paranoia — thinking about what could go wrong even if you’re strong — is a good thing, which is why I also say ‘if it’s not broken, fix it anyway’,” he goes on to say.

But not all transformations are successful, he points out. According to a BCG Turn report last November titled ‘The Comeback Kids — Lessons from Successful Turnarounds’,  75% of major transformation efforts do not achieve their expectations for target value, timing, or both.

“There are essentially three things that we said, backed by evidence, that if you do right,will result in a higher likelihood of success. The first thing is, to balance short and long term. When you do a transformation, it’s not enough to cut costs and streamline. You also need to have a long-term orientation to invest into digital, into research and development and so on.  Short-term fixes can help you right now, but we see that the companies that also have the long-term orientation [are the more successful ones]. And that is actually one of the most difficult things for managers to do,” he says.

The second thing is that new CEOs perform better when a company needs transformation.

“We see that new CEOs, especially when they are brough in from the outside, do better on average. I don’t think that means that you should then kick out the CEO. What it means is that incumbent or existing management teams cannot afford to underestimate the disruption and change that is happening in their industry,” he says.

“I think it’s very important that CEOs — even if they are three, six or nine years into tenure — constantly keep an open mind and are totally humble. In business, being proud is not good for anything because there is always more to do and you need to constantly challenge yourself. It might be that you are six years in and doing a fantastic job, but you must be able to face the music [that disruptions bring], look at things in a factual way and do what is needed,” he adds.

Interestingly, BCG’s analysis shows that while outsider CEOs typically bring about better transformation results, the results also show greater variability. “These CEOs take big swings, which sometimes lead to home runs but can also lead to strikeouts. A company needs, therefore, to be mindful of the potential for variability if it is recruiting from outside the company.”

Meanwhile, the third thing, says Fæste, is that companies need to have a comprehensive transformation programme.

“Companies can have many things going on — 10 small things here and there, without a common structure. We see that companies that have a comprehensive programme, and they go out to the stock market and say ‘this is our plan, we’re doing these five things, we’re following it, we’re tracking it’ — they have a higher chance of success,” he says.

In its report, BCG Turn screened the S&P Global 1200 for companies that had endured a significant decline in revenue, profit margins and/or market capitalisation since 2010 (excluding declines due to currency fluctuations), and found 11 examples — aptly named ‘The Comeback Kids’ — that successfully transformed despite unprecendented challenges.

The 11 are HSBC (in the financial services industry), Bristol-Myers Squibb (pharmaceutical), Boston Scientific (medical device), Nokia (technology), UPM-Kymmene (paper and biofuel), Groupe PSA (automotive), Olympus (medtech), Ajinomoto (chemicals), Lanxess (petrochemicals), Qantas (airline) and Acciona (infrastructure).

According to BCG Turn, collectively, these companies’ margins have increased by a weighted average of more than 50% since 2013. And, their share price has jumped 87% over the same period compared to a 41% increase for the S&P Global 1200.

“What these stories have in common are a formal turnaround programme and a successful balance between short-term wins and long-term strategy to reinvent the company. When leaders get their transformation right, they can dramatically improve profit margins and generate significant value for shareholders,” says Fæste, who co-authored the report with colleagues.

Nokia is a particularly interesting example, having transformed itself from a near-bankrupt mobile device maker to one of the world’s leading network insfrastructure and technology players.

“They have transformed five times over a 150-year history. They started in pulp making, they’ve been in rubber boots and tyres, they’ve done televisions, and then they were the world leader in mobile phones in 2007, but by 2012 they were almost bankrupt. They had to sell their mobile phone business, the one they were most proud of, to Microsoft in 2013 to raise some US$7 billion, and they reinvested that money into the network business, bought out Siemens’ in their joint venture and then bought Alcatel-Lucent to become the world’s biggest network player. And today it’s a US$30 billion company,” says Fæste, who was involved in the Finnish company’s turnaround.

He says companies have to optimise their business in order to be able to fund the investments that are required to make a change.

“Most companies have a very big need to invest in digital. Most companies maybe have a digital strategy … but fewer are then doing something about it, and even fewer have started to build the organisation to keep the capabilities.

“I fear that in big data and digital, if we’re not careful, it’s going to be a case of the winner takes all. And if you constantly postpone digital investments  because you don’t have the short-term cash to do it, then there’s a limit to how long you can postpone it before somebody is eating your lunch.”

 

 

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